Few things are more difficult or contentious for law firm managers than arriving at the fairest possible partner compensation scheme in keeping with the goals and culture of the firm. But, in today’s highly competitive legal marketplace, many are finding their best efforts undermined as other firms seek to lure key partners with exorbitant pay packages. “It’s a very real and immediate problem that law firms face right now. It’s one of the things that keep managing partners awake at night,” says Scott Jolliffe, chairman and chief executive officer of Gowling Lafleur Henderson LLP. “It’s creating an uncomfortable dynamic in the marketplace.”
Firms that are expanding, seeking to fill a gap, or satisfy a particular need that’s important to them are willing to pay above market compensation rates to acquire people, says Jolliffe. This puts tremendous pressure on a law firm’s compensation system, he explains, because you may end up paying large sums to retain people who are being courted, thus creating internal inequities in your partner compensation scheme.
Fairness and equity are the fundamental principles behind almost any partner compensation scheme. In most compensation systems, some partners will inevitably earn less than others on the basis of their overall contribution to the firm and they will accept that as long as they are satisfied that each partner’s pay is calculated on the same basis. But they will certainly feel shortchanged and may well nurse a grievance if they see other partners earning significantly more purely because they are threatening to jump ship, thus jeopardizing the interests of the firm in pursuit of personal gain. And, if partners lose faith in the fairness of the compensation system, it could undermine much of what their firm is trying to achieve.
Bill Tuer, managing partner at Macleod Dixon LLP in Calgary, describes the compensation system as “the largest tool the law firm has to motivate and change behaviour.” And, he adds, the key to ensuring partner buy-in is to ensure the system is predictable and consistent.
Ask almost any law firm manager, consultant, or recruiter and they will likely agree that money is the prime motivator for all. The compensation schemes at Canadian law firms range in complexity and sophistication from a pure eat-what-you-kill system, whereby partners are paid on the basis of the money and business they bring into the firm, to a variety of merit systems that also reflect other contributions to the firm. But the difference between these two models is not as great as people often believe, since bringing in work and billable hours will always be the bread and butter of any law practice.
Scratch the surface and everyone has an eat-what-you-kill philosophy, but merit-based systems try to “gentrify it or civilize it,” says Ian Dantzer, managing partner at the London, Ont., office of Lerners LLP. He says his own firm’s scheme gives some recognition to non-monetary contributions but mostly rewards personal production and business origination. “They want you to play nice in the sandbox,” says recruiter Adam Lepofsky, president of the Toronto-based RainMaker Group. But, he adds, the book of business a lawyer brings in is often the key criterion in lateral hiring at the partner level. “Everyone will always say they hope it’s a good fit, they hope he or she is a good person. Some managing partners out there say, ‘We don’t buy a book. We buy the person.’ Others say, ‘We’d like to say that. But we buy the book.’ The reality is, for the most part, this is a business, so you are buying the book.”
The eat-what-you-kill systems tend to be favoured by small or medium-sized firms and may be weighted in various ways to reflect the relative value the firm places on bringing work in, actually doing the work and billing for it, or passing the work on to others within the firm. Nevertheless, many firms that follow the eat-what-you-kill model also build in some recognition for contributions such as management duties, mentoring, publications, or public relations.
At Goldman Sloan Nash & Haber LLP, a Toronto firm with 30 lawyers, there is no set formula for partner compensation, which is determined through a committee process in which committee members each reach their own conclusions, which are then shared and discussed until a consensus is reached. “It works,” says Howard Sloan, president of the firm’s management committee.
While non-monetary contributions are considered, says Sloan, “we do try to attribute income to someone who is performing. We’re running a business. We want to motivate people. We don’t want it to be a dreadful place to work. We don’t want people to bear teeth and growl at one another. But, on the other hand, we’re capitalists. We believe you have to motivate people and allow people to be rewarded for their enthusiasm and their determination.”
Law firm adviser Colin Cameron, president of Vancouver-based Profits for Partners Management Consulting Inc., says larger firms are more likely to have subjective merit-based compensation formulas that assess various factors in addition to objective production numbers, one reason being they have the manpower to run such sophisticated systems. Also, as others have pointed out, these systems are most appropriate to firms dealing with corporate clients, where a premium is placed on such activities as teamwork and client relations.
Nevertheless, recruiter Dal Bhathal, managing director of the Toronto office of The Counsel Network, says most partner compensation in Canadian law firms comes from what partners are able to produce, bill, and spin off to other people. The reason for this, she says, is the leverage model of Canadian firms, which tend to have a partner-to-associate ratio of 1:1 or 1:2, compared to other jurisdictions where the ratio can be as high as 1:4. These low ratios decrease a firm’s ability to push work down to associates, thus decreasing profits, and leaving less money in the pot to reward activities that don’t directly bring in the cash.
Bhathal maintains that a fair partner compensation scheme, no matter what form it takes, is an important retention tool, because partners who feel they are not receiving equitable compensation are more inclined to “look across the street” for other opportunities.
And this brings us back to the dilemma posed by today’s highly competitive marketplace. How do conscientious law firm managers respond to situations where a partner threatens to move and take his or her book of business elsewhere? Do they cave in to exorbitant demands? Or do they stick to their guns by maintaining the fairness of their compensation scheme at the risk of losing a key partner?
Unfortunately, there are situations where you have to pay extra to retain partners, says Jolliffe. “It’s impossible to apply one set of principles in every case. You also have to look after the long-term future of the firm in the face of some pretty short-term pressures.”
However, Jolliffe suggests that partners who are contemplating a move should look beyond short-term greed and think about long-term happiness. “Lawyers are paid a lot of money for what they do and it’s more important to find an environment where you’re comfortable, enjoy coming to work every day, and can achieve the goals you set for yourself,” he says.